Fed more optimistic on US economy

The Federal Reserve said Wednesday it sees US growth picking up and unemployment falling by the end of the year, as it stuck fast to existing stimulus policies despite some short-term economic headwinds.

Stating "it's still a little too premature to declare victory," Fed chairman Ben Bernanke gave a slightly more upbeat view of the economy and rebuffed demands for more stimulus spending.

After a two-day meeting, Fed policymakers said they expected to keep interest rates near zero until late 2014, as Bernanke described further spending now to boost the economy as "reckless."

Bernanke offered stronger-than-expected 2012 growth and jobs projections as exhibit A in his defense.

The bank predicted unemployment will fall to between 7.8 and 8.0 percent by the end of the year.

Unemployment stands at 8.2 percent today, the lowest rate in three years, but nearly 13 million American workers are still unemployed, leading some to call for more measures to juice the economy.

The Fed also predicted that growth will reach between 2.4 percent and 2.9 percent by year's end, better than previously thought.

Against this backdrop, the Fed kept in place its policy of swapping short-term bonds for those with longer-term maturities -- a move that should put downward pressure on real interest rates and stimulate investment.

Still, Bernanke remained cautious, stressing he was poised to employ new tools if things turn sour.

"We would not hesitate to use them should the economy require that additional support," he said.

He warned that a looming debt fight in Congress could be one reason the recovery is derailed.

At the end of the year, automatic tax hikes and spending cuts will come into effect if Congress does not act. Bernanke warned that would be a disaster.

Using uncharacteristically terse language, he stressed the scope of the problem facing lawmakers and the Fed's limited capacity to clean up any broken plates.

"The size of the fiscal cliff is such that there's, I think, absolutely no chance that the Federal Reserve could or would have the ability whatsoever to offset that effect on the economy."

But with politicians stuck in hyper-partisan mode heading toward elections in November, a deal is far from assured.

Recent history may explain some of Bernanke's reticence.

In consecutive years the US recovery has stalled heading into summer months owing to Middle East revolts, European debt crises and a Japanese earthquake.

With that burned into the collective conscience, US economists, policymakers and Wall Street have come to greet glimmers of positive news with a certain skepticism.

There has been "a recurring and almost maddening 'stop-go' pattern to this recovery -- stronger pulses followed by lulls," said Joshua Feinman, chief global economist for DB Advisors.

Although investors had expected little else to come from the meeting, the fact the Fed tacitly admitted the recovery is only moderate and decided to take no new measures about it initially nudged markets downward.

"There were only a few small word changes... but they were notable changes in tone," said Michael Gapen of Barclays, referring to the March Fed statement.

"That signals to us that the Fed is not expecting to conduct further asset purchases or continue its maturity extension program beyond June."

But the improved jobs and growth forecasts nudged markets back upward.

The Dow Jones Industrial closed up 0.69 percent, and the Nasdaq 2.3 percent, also helped by strong quarterly earnings from Apple and Boeing.

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